STARTUPS'RECOMMENDATIONS

for the post-COVID-19 economic recovery

July 2020

ExecutiveSummary

Startup communities are playing a keyrole in building a green and digitaleconomy post-COVID-19. This documentoutlines 13 concrete recommendationsfrom startup organisations to nationalgovernments and internationalorganisations in the fields of investment,talent and policy. It is all a call to theEuropean Union and governments acrossthe globe to provide startups withfinancial and political support,empowering them to thrive and build theeconomy of the future.

THIS DOCUMENT OUTLINES 13CONCRETE RECOMMENDATIONS

FROM STARTUP ORGANISATIONSTO NATIONAL GOVERNMENTS

AND INTERNATIONALORGANISATIONS

In collaboration with Allied for Startups' COVID-19 Working Group :

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13 Recommendations

Adapt the Temporary Framework on State Aid Liquidity1.

3. Design EU funding programmes for startups

2. Balance safeguards and financing needs of the economy

3. Design EU funding programmes for startups

4. Unleash private capital through a multi-tier plan

5. Strengthen the roles of public funding

6. Formulate procurement rules that are more open to startups

7. Create an EU wide startup visa

8. Unify and extend stock options schemes at the EU level

9. Promote digital and entrepreneurial skills in education

10. Provide entrepreneurs with a digital one-stop shop.

11. Shape legislative tools that welcome innovation

1. Adapt the Temporary Framework on State aid liquidity

12. Harmonise EU rules in the Single Market

13. Enhance and simplify global trade for startups to scale

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INTRODUCTION:

Startup communities are playing a key role in building a green and digital

economy post-COVID-19. Startup organisations are sharing 13 concreterecommendations and urge the European Union and governmentsacross the globe to provide startups with financial and politicalsupport, empowering them to thrive and build the economy of thefuture.

The world is experiencing the largest digital transformation in its history.

Over 3.9 billion people, half the world's population, have been quarantined

in 2020. This has triggered a digital wave that has transformed our lives.

Telework and video conference platforms have more than tripled as people

work from home. E-commerce and food delivery platforms have doubled in

size. Gaming, delivery, e-sport, ed-tech are all sectors that have

exponentially grown during the COVID-19 crisis, providing solutions to

everyday problems during the lockdown.

The lockdown, however, has also had a large economic impact, which has

led to higher unemployment and exclusion. For this reason, now more

than ever, governments should support and invest in startups as the

biggest job creators in Europe and beyond. Since the beginning of March,

48% of startups globally have hired new employees and 78% plan to hire

new employees before the end of the year[1].

Moreover, the European Union has unveiled its recovery plan - Next

Generation EU, with a dual focus on digital and green growth. We believethe next generation of businesses and commerce in Europe shouldhave startups written all over it! Startups design, build and scale

groundbreaking innovations, providing technical solutions to our biggest

challenges and offering new services and products to benefit citizens.

The great digital leap resulting from the COVID-19 crisis will not be without

consequences for public institutions and companies. Making the economic

leaders of tomorrow a central piece of the economic recovery should be

the new way to approach our future economy. Startups are global from day

one. Any new policy measures that apply to them should be seen through

this perspective.

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By streamlining our production and consumption methods, startups’ solutions can

ensure the continuity of public services, create quality jobs and accelerate the

digital transformation and the environmental transition.

Startups communities in Europe and around the world are asking formore than a life-support plan. They want to contribute to and be part of

a new wave of founders tackling the big questions of our time. They can be

empowered by legislation that focuses not only on starting up, but also on

scaling up. Such legislation should be coupled with the right incentives for

entrepreneurs to spend their time doing what they are good at -

innovation - in order to build the digital and green economy of tomorrow.

[1] Source: https://data.stationf.co/#employment

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State aid - Adapt the Temporary Framework on State aidliquidity to ensure that startup ecosystems receive the samesupport as other economic actors

INVESTMENT

Particularly criteria (a) and (b) whichinclude UIDs (undertakings-in-difficulty) whose accumulated lossesare greater than half of their sharecapital. A wide range of startups inEurope fit this description despite notactually being in difficulty. The result ofthe current definition is that startupsare being refused State aid on thegrounds that it would be in violation ofEuropean rules.

Collect, compare and share the existingstartup definitions, learning fromestablished best practices.

More flexibility should be given to MemberStates in order for them to provideliquidity support to startups.

Urgently reform the definition of“Undertaking in difficulty” as defined inpoint 18 of Article 2 of the General BlockExemption Regulation (GBER). Thisdefinition is raising concerns:

Going forward, for the purpose ofproviding startups with State aid as well,ensure that the UID definition revisionworks for startups in the long run. Ifnecessary for State aid purposes, design astartup definition that encompasses thestartup ecosystem, building on the factthat startups reflect future potential andmay not have generated revenue yet.

Explore alternative instruments to

Being an SME (Companyemploying less than 250employees, with either an annualturnover of less than €50 million ora balance sheet total of less than€43 million. Exceeding thethreshold has effect only after 2consecutive financial years.)In case a startup scales beyondthis status rapidly, a credit systemcan smoothen the transitionoutside of the scope of thedefinition.Being less than 8 years old (thecompany definitively loses thestatus when it reaches 8 years).Being independent. Capital of thecompany must be at least 50%owned by individuals or by otherYoung Innovative Companies thatare at least 50% owned byindividuals. The company mustalso incur R&D expenses whichsum up to >15% of the tax-deductible expenses for that year.

ensure State aid arrives in startupecosystems. For instance, some MemberStates implemented a specific attractivestatus for young innovative companies,which provided governments with thelegal framework to offer tailored recoveryinstruments, tax credit for R&D andserved as an eligibility criterion for theemission of Tech Visas, etc. For example,France implemented the "Jeuneentreprise innovante (JEI)” status whichrequires:

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Balance safeguards and financing needs of the economy toensure that private investors can assist in the recovery byForeign Direct Investments (FDI).

Balance safeguards and financing needs of the economy toensure that private investors can assist in the recovery byForeign Direct Investments (FDI).

INVESTMENT

Foreign investors are significantcontributors to the financing of ourtechnology ecosystem. In 2019, 21% ofinvestments in European startups were ledby at least one American or Asian investor(compared to 10% in 2014). Since theoutbreak of the coronavirus pandemic, many governments have erected barriersto prevent foreign investors from takingcontrol of strategic companies. At theEuropean level, the doctrine vis-à-visforeign investors is evolving rapidly. At theend of March, President of the EuropeanCommission, Ursula von der Leyen, urgedEuropeans to "protect their security andeconomic sovereignty". A key componentfor startup ecosystems in Europe remainsforeign investment rules that areworkable.

The criteria for controlling the entry ofinvestors in the capital of a Europeancompany should not be based on thetechnology used by the company (e.g.AI) but on the scope of application ofthat technology (e.g. management ofvital infrastructure);The requirement for the potentialinvestor to take on specificcommitments must remain exceptionaland perfectly detailed if necessary; The investment process should not beprolonged excessively by the FDIcontrol mechanism. Taking intoconsideration the dynamics of theinvestment market, the long processof FDI screening can prevent non-EUcompanies from conducting businesstransactions; FDI screening regulations acrossEurope should introduce exclusions forinvestors from trusted jurisdictions,such as the Organisation for EconomicCooperation and Development (OECD)countries, from their regimes.

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Ambitious EU budget - EU funding programmes should bedesigned and made easy for startups to benefit from them.

Negotiations for the European Union'spluriannual budgetary framework areentering a decisive phase. This budget willdetermine what the European Union willbe able to deliver in this strategicallydecisive sector. Putting digital at the heart

of European recovery also meansdedicating funds to underline thisinterest, which includes increasing thebudget allocated to innovation in the nextEuropean Pluriannual FinancialFramework.

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INVESTMENTIncrease resources for Horizon Europe:While the Commission proposed abudget of €94.1 billion for HorizonEurope, this amount needs to bereassessed in the light of the currenteconomic and health crisis. The budgetallocated to Horizon Europe should beat least €120 billion, as proposed bythe European Parliament.Expand EU digital capabilities withDigital Europe: The Digital Europeprogramme should invest in critical andstrategic sectors, in particular ArtificialIntelligence and cybersecurity. Thebudget allocated should be at least€15 billion (€9.2 billion currentlyplanned for 2021-2027).

Encourage intra-European investmentby raising an ambitious vision of theInvestEU programme to €100 billionduring the forthcoming negotiationson the multi-annual budgetaryframework.

Next Generation EU - Design acomprehensive European recovery plan,with funding conditional on commitmentson digital switchover and greenguarantees. During the COVID-19 crisis,startups have proven they are part of thesolutions of today’s challenges such asthe protection of the environment and thedigitalisation of the economy. TheEuropean recovery fund should putstartups at the center stage of itsfinancial support.

Multi-tier plan to unleash private capital - Mobilise privatefunding via VCs, Business Angels and other types ofinvestors

Business Angels provide seed or pre-seedfinancing for startups. This equitycontribution is often the main - if not theonly - financing option when creating astartup. It is also an essential prerequisitefor obtaining capital from banks: the loansmade available to startups areproportional to the equity of thesecompanies.

In the United Kingdom, the regulatory andtax conditions are largely favourable toventure capital and investment,particularly in promising technologies, notonly for startups (Seed EnterpriseInvestment Scheme) but above all forscale-ups (Enterprise Investment Scheme).

Set up an incentive scheme in everyEU Member State similar to the UK'sEIS, SEIS and SITR instruments. Thepromotion of a "SEIS-alike" clause inthe EU Startup Nation Standard willbe a prime example to illustrate whatGovernments can do to facilitateaccess to finance for startups.Increase significantly the tax relief forinvestment in startups in the MemberStates, allowing capital losses onsecurities to be offset against alltaxable income (and not only againstcapital gains). Thus, Business Angelswho make a capital loss on a holdingwill be able to offset the lossesagainst all income (and not only, as isthe case today in some MemberStates, against possible future capitalgains of the same kind).

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INVESTMENT

Public funding - Strengthen the roles of the EuropeanInvestment Fund and the European Investment Bank asfinancial partners of startups and VCs.

Support startups in their first stage:The European Investment Bank shouldoffer bounce-back loans that areguaranteed against governmentcollateral and interest-free in the firstyear. Strengthen the development ofbusiness angels in Europe by extendingthe European Angels Fund (EAF) of theEuropean Investment Fund (EIF) toother EU countries (the EAF exists inAustria, Denmark, Finland, Germany,Ireland, the Netherlands and Spain).One way to do it is by contracting co-investment agreements with businessangels selected on the basis of theirinvestment capacity (+ €250K over 10years) and their track record. The EAFwill be able to co-invest with theselected Business Angel a venturebetween €250K and €5M.The European Investment Fund shouldcreate a tech buy-out fund toaccelerate direct and indirectshareholdings in strategic sectors forEurope (health, cybersecurity, ArtificialIntelligence, quantum computing,blockchain, etc.).

European financial institutions have thepotential to facilitate direct investment in startups. The emergence of startupsdepends on the multiplication of sourcesof seed funding and European financialinstitutions are a source guaranteeingstability for startups and VCs.

Tech buy-out is the purchase of amajority of the shares of a startup bya private equity fund aiming atcarrying out an internal reorganisationor even strategic mergers betweencomplementary companies. Itsobjective is to create a more efficientcompany, and potential EU champion;Increase the EIF's direct investmentvolumes in co-investment withventure capital funds, Bpifrance, KfW,and other national investment banks;Increase in 1-for-1 partnerships or co-investments with VCs, in the form oflong-term loans with a 2-year graceperiod and/or convertible bonds; Set up a guarantee to Facilitateaccess for VC funds in times ofdisinvestment to credit lines toincrease reserves for holdings locatedin Member States; Increase the EIF's holding ratio in thefunds, by decision of the EIF; Devise an EU Entrepreneurship Grantfor young European entrepreneurs tolaunch a technology-based productwith a high capacity to scale;Implement a fast-track procedure forthe analysis of investment dossierswithin the EIF, including for new "firsttime teams" funds. Today, theprocedure for analysing an investmentdossier in a fund takes an average ofnine months.

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INVESTMENT

Public procurement - Design procurement rules that are moreopen to startups

The current crisis has disrupted the use ofdigital technology by public services.Public procurement accounts for 14% ofthe EU's GDP. There is an opportunity toaccelerate the digital transformationacross the European Union by adaptingpublic procurement to startups. Manycontract offers are de facto unavailable tostartups: the eligibility conditions do notalways allow them to qualify for thesemarkets. The procedures are slow:sometimes it takes longer than 6 monthsbetween the submission of a file and theresponse to a call for tenders(inappropriate response time for a youngcompany in need of contracts);qualification criteria and thresholds areinadequate (turnover, institutional clientrelationships proofs, duration of existence,etc). The goal would be to achieve 20% ofpublic procurement covered by startups orin cooperation with startups.

Promote joint cross-border publicprocurement, including innovativeprocurement by large purchasers. Thehealth crisis has demonstrated thatthe European Union can initiate jointprocurement processes on behalf ofMember States. Promote joint purchases, which couldbe an advantage for both industry andMember States (high visibility overtime, prices, prior harmonisation ofneeds). Develop rules for Europeanpreferential purchasing. Part ofEuropean public procurement shouldbe reserved for European companies,following the example of the UnitedStates.

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TALENT

Startup Visas - An EU wide startup visa, as well as a globalequivalent to simplify the recruitment procedure for startups

Stock Options schemes should be unified and extended at theEU level. Similar attractive schemes should be developedglobally

Use the "Startup Nations Standard" ascommon ground recommendations forattractive visa conditions for thirdcountries. It should be based onestablished best practices in existingmodels in the above mentionedcountries (France and the Netherlandsin particular) to avoid fragmentationand new complexities.

Startups visas should be updated to lowerthe administrative burden for startupswhen it comes to hiring talent from aroundthe world, and be extended from not justfounders, but also early stage employeesand developers. This would enable suchcompanies to obtain work permits for theiremployees and their relatives quickly.Moreover, it would strengthen Europe'sattractiveness for international digitaltalent and enable intra-European mobility.By way of comparison, more than half ofall AI jobs in the US are filled by foreignnationals.

The Startup Nations Standard is a newimpetus for EU countries to createattractive conditions for Stock Options.The attractiveness of a startup is based onthe interest of the mission, but also on theremuneration package offered. In practice,startups base their remuneration both onfixed and/or

Create a special visa allowing non-EUcitizens to come to a given EU countryand then be able to work in another,with the same visa. The beneficiary ofthis visa will be allowed to work in the22 EU countries that are members ofthe Schengen Area. This format ofagreement, which could take the formof enhanced cooperation, similar tothe European unitary patent model,would have the advantage of notfrustrating global negotiations in theevent that one or more countries didnot wish to be associated with it. TheFrenchTech Visa and the EstonianStartup Visa are two great examplesof startups visas in the EU. Italy,Denmark, Ireland and the Netherlandshave developed similar programmes.These countries could be the firstadherents to such a Europeanenhanced cooperation programme.Germany should be encouraged tolead and join this type ofattractiveness programme.

variable components, but also on capitalincentive mechanisms (“BSPCE” inFrance, or Stock Options). Equityparticipation mechanisms create a stronglink between the startup and theemployee, who is thus financiallyinterested in increasing the value of thecompany.

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TALENT

Digital and Entrepreneurship skills should be promoted inprimary, secondary and university-level education

Review the SME strategy in the light ofthe current crisis. This review shouldcall for the urgent implementation ofthe "Startup Nations Standard", whichcontains improved Stock Optionsschemes for startups by MemberStates. The conditions recommendedby the Commission should be based onestablished best practices, ideallymodelled after existing frameworks inthe United Kingdom or France to avoidfragmentation and new complexities.

EU Member States should work for theunification of Stock Options schemesacross Europe, to avoid startups having toadapt to 27 different schemes andtaxation. An EU harmonised Stock Optionsscheme should be open to as manystartups and employees as possible,offering favourable treatment in terms ofregulation and taxation. For example, dueto restrictive legal and tax regulations,German Stock Options schemes are notvery attractive for French entrepreneurswishing to develop activities and recruit inGermany.

Encourage free training in coding orentrepreneurialism for all audiences, atall ages (citizens, children, high schoolstudents, college students, job seekers,non-specialized employees).

The development of new technologies inEurope necessitates that talent at alllevels and in all fields be trained andqualified.

Analyse existing Stock Optionsschemes in France and in the UnitedKingdom to startups crossing certainthresholds, in particular:

The threshold of ownership of thecompany's capital by naturalpersons, directly or indirectly.Indeed, the financing of startupsshould be encouraged in all itsforms - even if this financing leadsto a dilution of individual shares.The latter is not contradictory withemployee profit-sharing andattracting talent in a growingcompany;A registration period of less than15 years could be extended: toenable more mature companies toattract talent under attractive taxand social conditions.

Leverage EdTech startups which offeronline training courses through publiccontracts proposed by the nationalministries (Education for the trainingof teachers and pupils; HigherEducation to boost and strengthenuniversity trainings; Ministry of Labourto include digital training modules inthe training programmes of jobseekers, etc.).

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TALENT

Facilitate applications for the approvalof certifying training courses. Theprocedures are long and complex (needfor external advisory support).Moreover, they are designed andthought out in their criteria for inperson training rather than onlinetraining.

Encourage cross-borders skillsexchanges programmes intra andextra-EU (e.g. Erasmus for YoungEntrepreneurs) between universities,research centres and startups.

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POLICY

Digital one-stop shop - Give entrepreneurs a central go-topoint for all regulatory questions from the outset

Sandboxes - Design legislative tools that welcome innovators

Harmonised EU rules to avoid fragmentation in the SingleMarket

Recommend the implementation of aone-stop shop in each Member Statefor national rules and programmes.This could be included in the EuropeanStartup Nation Standard and promoteexisting frameworks like FrenchTech orTechLeap as best practices.

Develop and complete the one-stop-shopthat collects information, useful tools, andpotential public funding programmes

Regulatory Sandboxes have theopportunity to bring together policy-makers and innovators in a safe setting todevelop pathways to compliance forindividual startups. Startups are, bydesign, building innovative products andservices in innovative ways. Based on theUK’s FCA Sandbox for FinTechs, thereshould be a new initiative to establishregulatory

For startups, any new legislation in formof a directive that is implemented in 27different legal regimes is an impediment toscaling up in Europe. Instead, whereverpossible, rules should be harmonised fromthe outset.

Implement a EU one-stop-shop tohelp startups navigate through EUlegislation and programmes and toreduce administrative burden onentrepreneurs.

Design sandboxes for startupswhenever there is sweeping newlegislation where there is room forinterpretation (e.g., when there is‘principle-based’ legislation). Modelthese of best practices, for instancefor FinTechs in the UK or from Estonia.

engagement early on and include it in astartups’ design process.

Conduct a startup Refit of the DigitalSingle Market EU directives todetermine whether they pose asignificant legislative burden forstartups. Where this is the case, usethe next Review of the legislation tominimise or remove this impact.

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POLICY

Global trade - as a key component for startups scalingabroad - should be enhanced and simplified

Propose legislation that is harmonisedby design in all Member States.Entrepreneurs might prefer to complywith a comprehensive regulation ratherthan 27 interpretations of a directive.

Leverage the WTO and OECD to devisecommon frameworks for taxation. Use WTO & OECD bodies to underlinethe free flow of data and build robustdata adequacy agreements. Commencenegotiations on a data adequacyagreement as soon as possible.

Accompany the SME Strategy with aScale-up Strategy, with a dedicatedemphasis on startups to ensure thatthey can still scale their businesseseasily across the continent.

Tear down and prevent digital tradebarriers, for instance removing datalocalisation measures in future EUtrade deals, following the example ofthe EU's “Free Flow of non-personaldata” Regulation and the EU-Japandata flow deal.

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The COVID-19 crisis is an opportunity to adapt the economy to theworld’s biggest challenges. Startups are an integral part of thisadaptation. With the right liquidity support, investment incentives andthe regulatory framework, startups will be able to unleash their potentialto the benefit of citizens and the economy at large.

CONCLUSION: